Discounted Cash Flow Analysis

Question 1

Does the accounting rate of return consider the time value of money ?

Answer 1

No

Question 2

The Return divided by the investment is an example of what?

Answer 2

The accounting rate of return

Question 3

Why accountant must discount the relevant cash flows using the time value of money ?

Answer 3

because a dollar received in the future is worth less than a dollar received today.
Thus , when analyzing capital projects, the management accountant must discount the relevant cash flows using the time value of money .

Question 4

A quantity of money to be received or paid in the future is worth less than the same amount now. the difference is measured in terms of what ?

Answer 4

in terms on interest calculated using the appropriate discount rate.

Question 5

What Is the Time Value of Money ?

Answer 5

The time value of money (TVM) is the concept that a sum of money is worth more now than the same sum will be at a future date due to its earnings potential in the interim.

Question 6

The present value (PV)

Answer 6

The present value (PV) of a single amount is the value today of some future payment.
1) It equals the future payment times the present value of 1 (a factor found in a
standard table) for the given number of periods and interest rate.

Question 7

The future value (FV)

Answer 7

The future value (FV) of a single amount is the amount available at a specified time in the future based on a single investment (deposit) today. The FV is the amount to be computed if one knows the present value and the appropriate discount rate.
1) It equals the current payment times the future value of 1 (a factor found in a standard table) for the given number of periods and interest rate.

Question 8

Annuities

Answer 8

An annuity is usually series of equal payments at equal intervals of time.

• Ordinary Annuity ( annuity in arrears)
• Annuity due ( annuity in advance)